The effect of foreign banks entry on the financial performance of local commercial banks in Kenya

Abstract

The purpose of the study was to examine the effect of foreign banks entry on the financial performance of local commercial banks in Kenya. The adopted the descriptive design. The population of study consisted of all the 31 licensed local commercial banks that were dully registered with Central Bank of Kenya by December 2012. Secondary data was used in this study which included data on financial performance; determinants of financial performance as well as foreign bank entry were obtained from CBK and the published financial reports of the individual banks. The data collected covered the period between 2003 to 2012. Inferential statistics was adopted to analyze the data whereby regression model was adopted to show the relationship between foreign banks entry and the financial performance of local commercial banks. The study found out that entry of foreign banks have led to transfer of good banking practice and know-how, technology transfers from the foreign banks to the local banks which have improved efficiency in services, introduction or adoption of new products and the creation of improved competitive environments. The study concludes that foreign bank improves the profitability of local banks; the entry of foreign banks had also affected the costs of services in local commercial banks. The study recommends that the government should encourage more local banks to introduce strategic investors. The Kenyan government through the CBK should encourage and help local banks to improve partnerships with their existing foreign banks so that they can adopt new product and services from the foreign banks. There is need for the government to the eliminate barriers to entry of foreign banks into Kenyan market so as to attract more banks in the local market.